$20 oil: Maybe ‘new oil industry’ isn’t so new

Published 7:32 pm, Saturday, January 16, 2016

A dust storm rolls across FM 829 in Stanton. James Durbin/Reporter-Telegram

A dust storm rolls across FM 829 in Stanton. James Durbin/Reporter-Telegram

Photo: JAMES DURBIN

$20 oil: Maybe ‘new oil industry’ isn’t so new

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Though most hoped they would never see an oil bust again, Midlanders knew it was a possibility, given the oil and gas industry’s cyclical nature. But two weeks into the new year, oil prices have fallen below $30 a barrel, a far cry from the triple-digit prices in 2014.

“It has a deep psychological impact. Every time you change the number in $10 increments, the psychological impact deepens,” said Karr Ingham, an Amarillo-based oil and gas economist.

As crude prices surged and technological advances in horizontal drilling and hydraulic fracturing unleashed the “shale revolution, people reveled in the belief the industry had entered a new era,” Ingham said.

“It leaves people wondering if what seemed like a sustainable uptick — a leap in prices, if you will — will ultimately prove to be an anomaly, a blip on the radar at this point in time. I’m not sure of the answer that question myself,” Ingham said.

He pointed out that, adjusted for inflation, this week’s $27 posted price “is about where the industry was in February 1986.

“That calls to mind times we don’t like to think about. And now people are talking about oil in the teens. I’m not sure that will happen, but once it gets close enough to talk about these things, it feels like the oil industry of old rather than the oil industry of new.”

Watching crude prices plunge, jobs lost and work slowing down, Mayor Jerry Morales said Midlanders should be cautious about their finances. He said that everyone should watch their spending “and act like it’s $20 oil.”

That’s advice he said he and the members of City Council are taking in closely evaluating every project, every purchase to make sure it’s justified.

“We’re doing due diligence to see what’s necessary. That’s why we’re going after certificates of obligation to fund projects to keep up with growth: road improvements, right-of-way, software upgrades. We have to do these things, but we still have to be cautious.”

Even so, he said the community needs to be prepared for the future.

“Since 1950, we’ve never seen the population decrease. The community is growing, we’re seeing more homes, more construction and we need more infrastructure. All of that is going on, and we need to find the revenue,” he said.

Even today, the school district is reporting an increase in enrollment rather than the expected decrease, Morales said.

“That tells you people are staying, more people are moving in and we need to be prepared,” he said.

“We’re paying the price now for $100 oil and the way everything built out and production jumped,” said Robert Rapier, an industry veteran who writes and blogs about the industry.

There is a difference between now and when prices fell amid the global economic recession, he said.

“The difference between now and 2008 is we didn’t have the supply overhang in 2008,” he said.

Saudi Arabia prompted its fellow members of the Organization of Petroleum Exporting Countries to keep producing in order to protect market share and drive shale producers out of business. With 70 percent of the world’s oil reserves, OPEC could have cut production to support prices and kept market share, but they feared shale producers, Rapier said.

“I think the Saudis made a trillion dollar miscalculation. I think the Saudis miscalculated how quickly shale producers would cut back,” he said.

With prices in the $20s, “there will be more bankruptcies, but OPEC will not destroy U.S. shale producers.”